Plain Advice

In the article titled “Rebuilding Credit Part 2: Pay Down Debt”, we talked about decreasing the amount you owe as a first step toward improving your credit. As I stated in that post, it is not necessary to get rid of all your debt before you start working on improving your credit. The important thing is to get it down to a manageable level, a level where you can reasonably meet your obligations. Until you get to that point, no further steps can be successfully implemented. Lowering your debt will also help you improve your debt to income ratio, which has a postive effect on your credit score.

Make Payments On Time

The second step is simple, yet extremely important. I hesitate to even call it a step, because it is an ongoing process that you must continue to do on a regular basis. The step I am talking about is developing a habit of paying your bills on time. There are several things I have implemented to help me do this.

First of all, realize that it is crucial to your credit health that you pay, at the very least, your minimum payments on time. It is not ideal to make only a minimum payment, but neglecting to do at least this much reflects very poorly on your credit. Just do it. Over and over, month after month. Punctual payments made over time have a drastic positive impact on your credit.

Something that helps me make my payments on time is writing down in my planner (which I look at often for work) when they are due. I am terribly forgetful when it comes to due dates, so this helps to clue me in when a due date is coming up.

Continue Using A Credit Card

If you have paid down your debt so much that you no longer have balances on credit cards (CONGRATULATIONS!), don’t cut up all your cards just yet. Continuing to use one or two cards can help to build your credit. Use your card(s) knowing that you will be able to pay off the balance from month to month. Some financial experts may disagree here, as creditors like to see that you carry some type of balance. There may be some merit to this, however I generally choose to zero my balance out monthly for the following reasons. By paying off the entire balance (on time), my debt will never get out of control or beyond my means to pay off. It also means that I will not be paying interest on those purchases I make with the credit card.

Obtaining a Credit Card with Poor Credit

If you have already burned your bridges with your credit card company, you may need to apply for a new account. With a poor credit score, you will most likely have to settle for a less than ideal card for the time being. Don’t worry… as your credit improves, so will your options of credit card terms. When I was at this step, I started my search for a new card by applying for attractive credit terms (low interest rates, cash back incentives, high credit limits, no monthly fees). I quickly learned that these types of terms are not offered to the credit challenged. If you have extremely poor credit, you may only qualify for a secured card. This means that you give the company a certain amount of money which amount is your credit limit. If you do not meet your obligations, they simply keep the money you have already put down as a deposit.

The card I ended up settling on was not secured, but it did require a $4 monthly fee whether I used the card or not. It also had a very low limit of $300. I accepted this based on the knowledge that it was only temporary, and that I was going to use it as a stepping stone.

How to Use Your Card

Using credit cards to rebuild credit requires a shift in thinking. Instead of mindlessly using the card, or using it for money you don’t have, you must now use it in a very calculated and planned way. It is simply a vehicle to get you where you want to go. However, if you revert to old habits, it will take you even further in the other direction.

Decide what you will use the credit card for. Something you already have room for in your budget. Something you would buy whether you had this card or not. Maybe you decide you will use it only for gasoline purchases. Set aside the money in your bank account that you would normally be using for gas. Use the credit card as planned. Mark in your calendar that due date for the payment and PAY IT. Its really that simple. Do this month after month, and you will see that this is a powerful tool for rebuilding your credit.

Tips for Those Living Paycheck to Paycheck

If you are living paycheck to paycheck, making your payments on time can be challenging simply because your paycheck may not coincide with when your payment is due. This problem plagued me for a long time. However, the solution again comes down to planning. I started writing on my calendar when I would get paid, and then I would scan the calendar for what was due before I was getting paid again. I would then write in the items that would need to be paid out of this paycheck. You should ideally make the payments as soon as you get paid, to ensure that you are using your money for the important things.

If, on a particular payday, my due dates on bills exceeded the money in my check, I would prioritize the payments. Keep in mind that in general, being 2 weeks late on a utility payment may cost you a few extra dollars , but paying even one hour late on a credit card will usually cost you a hefty late fee ($30 seems to be pretty typical). Those late fees can really start to add up, and before you know it your credit card becomes unmanageable again. Remember, once you incur a late fee, it is added to your principal balance and you start paying interest on it.

Also keep in mind that being a month late to a utility company will not usually hurt your credit, but passing that 30 day late mark with a credit card is highly significant to your report. I am not advising that you ignore your utilities and other similar bills; just pointing out that in general, they are much more flexible and workable than credit card or mortgage companies.

Conclusion

The importance of establishing a track record of paying your bills on time cannot be overstated here. It is the most important step to take toward rebuilding your credit. Although it takes discipline to plan and execute this plan, you will see that it is all worth it when your credit report starts reflecting that you are acting responsibly with regards to your financial obligations!

Your comments are valued. Please take a moment to leave one if you have any experience, tips, or questions on this topic.

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This entry was posted on Tuesday, September 4th, 2007 at 2:16 pm and is filed under Finances. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.